If you want to pass your wealth and assets on to the next generation, a Family Investment Company (FIC) could be an option to consider. In this blog we’ll explore what a Family Investment Company is, outline possible advantages and disadvantages, and help you decide if it’s the right choice for your family.

What is a Family Investment Company?

In a nutshell, a Family Investment Company is a type of company used to hold and grow family wealth across generations in a more tax-efficient way. In an FIC, older generations are able to hold and manage things like assets, shares, cash, and property in a way which allows:

• Parents/founders to retain control
• Future growth to pass onto generations such as children or other family members

They can be appealing to many families, helping to avoid immediate Inheritance Tax (IHT) charges. They’re often used as an alternative to trusts when it comes to estate planning because they’re less legally complicated (basically because they’re just another limited company). But there can be tax implications, so assessing the benefits before opening an FIC is crucial.

How FICs work

The founders of an FIC can transfer things like cash and non-cash assets into the company, in exchange for shares and loans. This is where using different share classes can be useful.

Sometimes called alphabet shares because of the way they’re shown in the accounts, creating share classes allows the company to grant different types of rights and permissions to different shareholders.

You can use the money in the company to buy income-producing investments. Income can either be reinvested or used to repay any loans you have – and any growth in value will benefit your children.

The shares you have can be recorded as a ‘gift’ to family members, avoiding Inheritance Tax, as long as you live for at least 7 years from when the shares were gifted (otherwise IHT will be triggered).
 

The tax benefits of a Family Investment Company

There are several potential tax advantages to using a Family Investment Company, such as Inheritance Tax, and even Corporation Tax relief. We’ll go into more detail below.

Inheritance Tax

Gifting shares through an FIC can be a way to minimise exposure to Inheritance Tax. As long as the gift is made outright (no strings!) and you survive for at least seven years from the date of the gift, the shares’ value won’t form part of your estate for working out Inheritance Tax.

This is different from giving the shares to a trust – which will trigger an immediate 20% IHT charge on anything above your nil-rate band (the amount of your estate which can be passed on without triggering Inheritance Tax).

Corporation Tax

Investment profits in an FIC are usually taxed at a lower rate than personal income tax.

For example, whilst the majority of Family Investment Companies are not eligible for the 19% small profit rate (because they are classed as a close investment-holding company), it’ll pay corporation tax at 25%, which is still much lower than the top personal income rates (for example 45% in England, Wales, or Norther Ireland, or 48% if you live in Scotland). So it could result in more profits left over after tax, ready for reinvestment.

Corporation tax relief

A Family Investment Company (FIC) can reduce its corporation tax by claiming normal tax-deductible costs. For example, if the FIC holds a property, the company will be able to claim tax relief on the property expenses, just like any other company can.

It’s also worth noting it can claim costs such as the charges and interest on loans used for the company’s business (for example, investing). This is an advantage because individuals usually can’t get tax relief on loan interest, but an FIC can.

Dividend Tax and shareholder taxation

An FIC doesn’t need to pay tax on dividends it receives from its investments. But, if your FIC pays dividends out to its shareholders, the shareholder may need to pay tax. The good news is everyone has a dividend allowance (which is currently £500), meaning the first £500 is tax-free. You’ll get this on top of your £12,570 personal allowance, too.

Anything over that will be taxed according to the total amount of income (not just dividends) you get in the tax year. For example, someone whose total income falls into the basic rate tax band will pay the dividend basic rate on the dividends they receive.
 

This can be more appealing than a trust, because even dividends taxed at the highest rate tend to be much lower than trust tax – which can be as high as 45%.

Capital Gains Tax

Disposing of an asset (such as selling it, or transferring it to someone else) will usually trigger Capital Gains Tax (CGT). With proper planning, you might not need to pay CGT when you initially set up your FIC and transfer assets into it. If you do dispose of any assets in the future though, you may need to pay Capital Gains Tax at the normal rates.

Here’s a couple of things to note:

• For assets owned before 1 January 2018, an indexation allowance can reduce the taxable gain (so you’ll pay less CGT)
• If you transfer assets into the FIC, the person transferring them may have to pay Capital Gains Tax
• In most cases, it’s more tax-efficient for the FIC to buy assets using loan funding rather than transferring existing assets

The legal liability of a limited company

A Family Investment Company is a separate legal entity to the people who own and manage it, which means the extent to which they’re personally liable is limited. In plain terms, this protects the investments held by the company from any potential creditor claims or legal settlements, which holding the investments personally would not do.

Are there any complications to a Family Investment Company?

Whilst a Family Investment Company can be a powerful structure for managing wealth, it does come with some potential risks you should consider. Here’s a few things to take into account.

Legal and governance complexity

An FIC is usually a private limited company with family members as shareholders and directors. This requires formal governance, including articles of association and shareholder agreements. Proper governance rules are essential to avoid family conflicts getting messy!

Tax considerations

• Corporation Tax: FICs pay Corporation Tax on profits, including on the sale of any company assets. Dividends paid to family members are then taxed again (payable by the individual), potentially leading to double taxation if not carefully managed.
• Inheritance Tax (IHT): While FICs can help with succession planning, improper structuring may still leave assets exposed to IHT. Freezer shares (existing shares which freeze the value of a company at its current valuation) and growth shares (shares that only have value if the company’s worth increases beyond a set threshold) are a common approach here.

Investment limitations

FICs are typically better for long-term investments. They may not be suitable for high-risk or highly speculative trading if family members have differing risk appetites. You all need to be on the same page!

Some investments may be harder to hold through a company too, such as certain pensions or tax-advantaged accounts like ISAs.

Liquidity and access to funds

FICs are not like personal bank accounts. Being a limited company makes it a separate legal entity so any money in the FIC belongs to the company until it’s released legally: such as by declaring dividends, taking salaries, or repaying the original loan made to the FIC by the directors. Dividends are subject to shareholder approvals and tax, which can complicate cash flow for family members.

Costs

There are set-up and ongoing costs to consider.

• Set-up costs: Such as legal and tax advice which, though essential, can be expensive
• Ongoing costs: Think annual accounts, tax filings, and potential audits – all of which add recurring expenses!

Should I set up a Family Investment Company or a trust?

It depends. You need to consider things like the value of your assets, how much control you require over your estate, and your long-term goals for beneficiaries. Both structures are used for estate planning but they operate very differently when it comes to things like taxation, flexibility, and legal obligations.

The table below compares some key considerations.
 

Setting up a Family Investment Company

There are several steps to think about if you do set up a Family Investment Company, such as:

• Decide the goal: Be clear on what you’re doing this for. For example, long-term investing or passing wealth onto children
• Choose a company type: There are different types of limited company! FICs are usually a private limited company because they’re easier to set up, flexible, and understood by accountants, banks, and HMRC
• Decide who owns what: This is usually split between parents/founders and children/family. The founders will hold voting and control shares whilst the children will hold growth shares and benefit from the future value
• Put money into the company: You can fund the company by loaning money to it (which you’ll use to fund growth, and then withdraw the original loan amount at a later date without triggering tax for yourself), or share capital (the money you introduce into the company yourself in exchange for something else, such as shares)
• Open a company bank account: You’ll need to open a bank account in the company’s name and deposit the loan or capital into it
• Open an investment account: It’s important to remember the investment belongs to the company, not the individual
• Invest in and run it like a business: Which means you’ll need to keep records, file annual returns, and so on, just like any other company.

 
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